AAPL en fuego

At The Loop, Peter Cohen links to a Fortune report about analysts' pessimistic forecast for AAPL Q3 2013 earnings. The low forecasts are attributed to the lack of a new iPad and the expectation of slowing iPhone sales in anticipation of the iPhone 5S. Cohen concludes, "I expect we haven’t seen the bottom of Apple’s stock drop yet." The Loop is generally thought to have actual insight into Apple product introductions...

At The Loop, Peter Cohen links to a Fortune report about analysts' pessimistic forecast for AAPL Q3 2013 earnings. The low forecasts are attributed to the lack of a new iPad and the expectation of slowing iPhone sales in anticipation of the iPhone 5S. Cohen concludes, "I expect we haven’t seen the bottom of Apple’s stock drop yet." The Loop is generally thought to have actual insight into Apple product introductions...

Jim Dalrymple specifically, and his posts are more of the nature of a simple confirm/deny to specific statements (i.e. "X event on Y date", "Yep"/"Nope", like so). Cohen's post there just seems like...what he expects based on general analyst outlooks from that article.

Record revenue for the quarter at the top of guidance on the back of good iPhone volumes and very strong iPad volumes. Low GM at bottom of guidance. Dividend increase and significant share buyback plan.

I'd rather see some of that capital reserve go to acquisitions and r&d. Which isn't to say that won't happen too, but Apple has been very, very conservative in that regard. Which isn't to say a stock buyback isn't a good idea, but it's a little too much like them handing over their lunch money after getting roughed up a little. I know it's become tiresome to always bring up Jobs, but it's hard to imagine him rolling over quite so easily.

Also I wonder what google's executive compensation packages are like, Apple has gone to extremes to reward a group that so far hasn't been impressing all that much, and spending this kind of money in a way that helps ensure the value of those stock grants seems a little sketchy.

I'd rather see some of that capital reserve go to acquisitions and r&d. Which isn't to say that won't happen too, but Apple has been very, very conservative in that regard. Which isn't to say a stock buyback isn't a good idea, but it's a little too much like them handing over their lunch money after getting roughed up a little. I know it's become tiresome to always bring up Jobs, but it's hard to imagine him rolling over quite so easily.

Also I wonder what google's executive compensation packages are like, Apple has gone to extremes to reward a group that so far hasn't been impressing all that much, and spending this kind of money in a way that helps ensure the value of those stock grants seems a little sketchy.

Reducing the number of outstanding shares helps the EPS. This is a trick IBM has been doing for years.

You and I had discussed earlier the dramatic impact on the stock price a doubling of dividends might have (and which aapl could easily afford). I think investors were expecting/hoping for a dividend increase more significant than 15%.

It would be interesting to chart when the afterhours price started to fall off during the conference call.

edit:wrt share buybacks: aapl reported more shares outstanding now than a year ago. So much for the effect of aapl's share buybacks.

In reality, the past year's buyback program has not even been enough to offset the dilutive share grants to employees. When investors think of a buyback program, they usually think that will mean less shares outstanding, not more.

Perhaps the just announced buyback program will finally result in a drop in shares outstanding. However, investors might ponder whether this buyback will just compensate for employee share grants, as aapl's buyback did in the past, and the number of shares outstanding does not drop.

Also I wonder what google's executive compensation packages are like, Apple has gone to extremes to reward a group that so far hasn't been impressing all that much, and spending this kind of money in a way that helps ensure the value of those stock grants seems a little sketchy.

Au contraire. Apple's compensation packages are relatively stock-rich/cash-light, which is exactly what I, as a shareholder, want them to be. I don't want him obsessing over the stock price every 15 minutes, but I also don't want Tim's financial interests to ever run counter to my own.

Also I wonder what google's executive compensation packages are like, Apple has gone to extremes to reward a group that so far hasn't been impressing all that much, and spending this kind of money in a way that helps ensure the value of those stock grants seems a little sketchy.

Au contraire. Apple's compensation packages are relatively stock-rich/cash-light, which is exactly what I, as a shareholder, want them to be. I don't want him obsessing over the stock price every 15 minutes, but I also don't want Tim's financial interests to ever run counter to my own.

I want him making the best long term decisions for the company, not worrying at all about share price fluctuations. As-is it encourages Apple management to maximize short-term profits without regard for how that impacts the company going forward (e.g. r&d or acquisitions that don't have immediate payoff, running light on personnel so you have to juggle teams between iOS and OS X, etc.)

Make great, innovative products with good margins and the share price will take care of itself.

My understanding is they borrow against the foreign cash pile to give the US parent the cash to buy back shares, thus avoiding paying US corporate income taxes as the debt payments are deductible expenses. The interest payments are presumably some low rate like 2-5%.

I think a share buyback is the right move with the ridiculously low share price right now. If the shares were still 600+ then dividends might make more sense.

I'm happy they aren't doing crazy M&A activity. That sort of thing inevitably kills the corporate culture as you take on more than you can absorb at once; better to grow by adding team members so they can absorb the culture.

When Steve was forced out, the management went about putting an end to the college kid antics and converting Apple into a "grown up" company; we see how well that turned out. Jobs worked hard to undo the damage and from all accounts he worked hard to make sure that culture was embraced from the top down to make sure it didn't happen again. That's Apple's long-term value and must be protected.

The points made about revenue and earnings seem (to me) a more cogent explanation for the afterhours drop than anything to do with dividends.

I tend to agree with the linked article but only as regards the upcoming quarter. One other thing of note for next quarter is that, when given the opportunity, Peter Oppenheimer didn't say that next quarter's lowish margins would be due to product introductions. I think that it's a safe bet that there are no iDevices in the next quarter. I'd certainly bet on new computers, but mostly because of the promise of the MacPro and the introduction of Haswell. Since no re-design is likely for any of the computer except for the Pro, I doubt that any refreshes of those lines will significantly affect margins. After next quarter, I think that all bets are off. Between July and October, there will be all new iDevices and Cook certainly hinted at new products of some sort. Recent history shows a sharp increase in earnings (measured YoY) in response to these introductions, and I wouldn't bet against that; in fact, I would bet on it.

I tend to agree with the linked article but only as regards the upcoming quarter.

Since aapl only gave financial guidance for the coming Q, that's all that mattered in the article, imo, especially as it related to the potential for an imminent cascade of significantly lowered estimates.

When he got to his opinion of what aapl should do ... pfft. just another guy passing gas.

I tend to agree with the linked article but only as regards the upcoming quarter.

Since aapl only gave financial guidance for the coming Q, that's all that mattered in the article, imo, especially as it related to the potential for an imminent cascade of significantly lowered estimates.

When he got to his opinion of what aapl should do ... pfft. just another guy passing gas.

The article's conclusion didn't seem at all restricted to the next 8 days and 2 months. He said that nothing imaginable would ever rekindle Apple growth, except a new, large screen iPhone, or a couple other things. Barring those, he wrote

Quote:

And the guidance, horrid [sic] as it is, might well be followed by even worse quarters.

The points made about revenue and earnings seem (to me) a more cogent explanation for the afterhours drop than anything to do with dividends.

I tend to agree with the linked article but only as regards the upcoming quarter. One other thing of note for next quarter is that, when given the opportunity, Peter Oppenheimer didn't say that next quarter's lowish margins would be due to product introductions. I think that it's a safe bet that there are no iDevices in the next quarter. I'd certainly bet on new computers, but mostly because of the promise of the MacPro and the introduction of Haswell. Since no re-design is likely for any of the computer except for the Pro, I doubt that any refreshes of those lines will significantly affect margins. After next quarter, I think that all bets are off. Between July and October, there will be all new iDevices and Cook certainly hinted at new products of some sort. Recent history shows a sharp increase in earnings (measured YoY) in response to these introductions, and I wouldn't bet against that; in fact, I would bet on it.

Apple could refresh every single Mac and I don't think it would move the needle, revenue or earnings, significantly at all.

At current share price, Apple is slated to buy back roughly one quarter of all existing shares over the next two years. $100 Billion buys a lot of stock for a company with a market cap around $380 Billion.

Granted, next quarter looks to be soft, and the stock may bounce around until the next quarterly report, but when the hype starts for the next big thing™, the shares will increase rapidly in value. In fact, as soon as reliable rumors for the next big thing™ start, the escalator begins. It's difficult to calculate exactly when the next swing up starts, but the latest it starts is the first whisper of the next iPhone. I think the window to buy shares around this level is closing.

Does anyone know the mechanics of share buy backs this large? Does the company start buying up options? Or do they buy them on the open market at set intervals?

At current share price, Apple is slated to buy back roughly one quarter of all existing shares over the next two years. $100 Billion buys a lot of stock for a company with a market cap around $380 Billion.

I think the actual amount slated for stock repurchase is $60B through 2015...

So at this point my strategy is to be positioned long by early June. That gives the next six weeks to look for good buying points. Ideal for long term option purchases would be flat declining share price for a while, then load up on out of the money long term options that strike after the holidays. January or April calls.

Excellent point though: shrinking the outstanding shares at this magnitude should only help the price.

Hmm. But isn't the repurchase done with funds which are otherwise included in price calculations? In fact, by taking on debt to finance repurchase and dividends, effectively the share price will lose something in total...

Assuming, of course, the market views any of this stuff rationally - the cash is sometimes shown in calculations, but often not, so it may well look better

Edit: of course, if Apple sees their own shares as undervalued, and they can buy when the price is low, that's a big advantage. But I dare say buybacks will be spread out until 2015 rather than taking advantage of the current price...

Excellent point though: shrinking the outstanding shares at this magnitude should only help the price.

Hmm. But isn't the repurchase done with funds which are otherwise included in price calculations? In fact, by taking on debt to finance repurchase and dividends, effectively the share price will lose something in total...

Assuming, of course, the market views any of this stuff rationally - the cash is sometimes shown in calculations, but often not, so it may well look better

Edit: of course, if Apple sees their own shares as undervalued, and they can buy when the price is low, that's a big advantage. But I dare say buybacks will be spread out until 2015 rather than taking advantage of the current price...

Remember they're taking on debt to purchase those shares so they don't pay taxes as well, they then could use the money offshore to pay the debt.

I've heard a number of times that they are getting about 1% on their cash. Their stock pays 3% dividend at current share price. So they will arguably be tripling their return by buying their own stock. There will also be fewer shares outstanding, so the P/E will decline. Not to mention that the stock may increase in value from here so $400 today may be the equivalent of retiring a $1000 share in a year and a half.

Remember they're taking on debt to purchase those shares so they don't pay taxes as well, they then could use the money offshore to pay the debt.

It's premature to say their avoiding the repatriation tax hit; at this time all we can say is they're deferring it. The only ways to truly avoid it are to 1) wait/lobby for a repatriation tax holiday, or 2) concoct some legal strategy to create excessive offshore expenses that somehow eat up foreign cash holdings and while taxlessly transferring those expenses to the U.S. P&L.

Triple Dutch with an Irish Double-Double and Cheese Fries, anyone?

#2 sounds farfetched, but people have concocted far more elaborate tax avoidance schemes in the past. Disney once found a legal way to depreciate a theme park twice.

On the other hand, as an Apple stock holder, I'm glad they weren't buying the stock in bulk at $700 when they can now buy it at $400. I'd hope they are locking in the low price opportunity by buying up options, but I'm honestly not sure how these buy backs work. If they try to buy 60 Billion dollars of stock rapidly, it's bound to create something of a squeeze. That's more than two billion dollars a month in share purchases.

Apple has been trading an average of 15 million shares a day. 15 m x 400 = 6 Billion dollars in shares trading hands a day. (That's pretty amazing, isn't it?) That turn over is equivalent to the entire market cap every two months. Since I imagine most shares are just sitting in accounts and not constantly in flux, there must be an awful lot of shares loaned out from people's accounts flowing back and forth on the basis of market algorithms.

What happens when you retire 1/7th of the float by the end of 2015? I suppose we're about to find out. Would that constrict liquidity? Probably not. Velocity of shares could just increase. But presumably it will create a price floor of sorts. I certainly wouldn't want to be short the stock.

The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.

So, don't include that $10 bil when thinking of buyback impact on shares outstanding. Heh, $2 bil has already been spent.

Yeah, and the stock was at about 540 when that was written. Most of the employee options granted subsequent to that announcement are going to be underwater. I didn't have time to listen to the conference call, but I think they indicated that some of this money is earmarked for Apple to reprice some of the options they've granted to employees.

(Whooohooo, I'm rich! I've got five million dollars in AAPL! Oh, it's got a $650 strike price? And AAPL is at $400? Honey, where's the Top Ramen?)

So I can see the point of that, and don't begrudge the compensation or the repricing. However, I do hope the actual float is reduced after the buy back.

Well, that's a pretty gray area as the company isn't compelled to buy within any specific window and only offered a target of 'by the end of 2015.'

The fact that Cook presented a timeline for new products is a conspicuous break from the Apple norm, so you have to wonder. Gruber thinks Cook's remark was meant to lower market expectations for WWDC, and of course that makes sense. But since Apple is also a market participant...

By the way, I'm not saying this is necessarily a problem beyond the short-term complications of buying AAPL alongside Apple.

AAPL is fine too, unless you have to sell right now. I've made good money buying and selling AAPL, but when it's always high there's not much to be made. This is a buying opportunity. When the next iPhone is released, Apple will make a ton of money. Same next December. As far as I'm concerned, this is going to be easy money as long as you can hold through some bumps.

Apple's investments in its supply chain falls under the R&D heading. Which is why we've seen a yoy 33% increase in R&D last quarter. But they aren't going to be able to write off the lion's share of $145B by investing in their supply chain. (At least, not without buying their entire supply chain outright...)

Apple can float bonds on the European market, use their tax-disadvantaged cash to make interest payments and spend the income they get from the bonds on share repurchases without a single dollar having to be repatriated. (I think.) Not sure about monies paid out as dividends, however. I think that was one of the arguments against the "preferred" dividend distribution idea, that Apple would have to pay a huge tax hit to do it.

I don't really know anything about it except that I know some very smart people at Apple have looked at this and think it's the way to go.